The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2018
AND 2017 (UNAUDITED)
NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
–
China Pharma Holdings, Inc., a Nevada corporation, owns 100% of Onny Investment Limited (Onny), a British
Virgin Islands corporation, which owns 100% of Hainan Helpson Medical & Biotechnology Co., Ltd (Helpson), a company organized
under the laws of the People’s Republic of China (the PRC). China Pharma Holdings, Inc. and its subsidiaries are referred
to herein as the Company.
On
December 31, 2012, China Pharma Holdings, Inc. consummated a reincorporation merger for the purpose of changing its state of incorporation
from Delaware to Nevada pursuant to the terms and conditions of an Agreement and Plan of Merger dated December 27, 2012. The
reincorporation merger was approved by stockholders holding the majority of the Company’s outstanding shares of common stock
on December 21, 2012.
The Foreign Investment Industrial Catalogue
(the
“Catalogue”) jointly issued by China’s Ministry of Commerce and the National Development and Reform Commission
(the latest version is the 2012 version, effective January 30, 2012) classified various industries/businesses into three different
categories: (i) encouraged for foreign investment; (ii) restricted to foreign investment; and (iii) prohibited from foreign investment.
For any industry/business not covered by any of these three categories, they will be deemed industries/businesses permitted for
foreign investment. A typical foreign investment restriction in the pharmaceutical industry is that a foreign investment enterprise
(the “FIE”) shall not have the whole or majority of its equity interests held by a foreign owner if the FIE establishes
more than 30 branch stores and distributes a variety of brands in those franchise stores. However, the Company’s business
is not subject to this restriction.
Helpson manufactures and markets generic
and branded pharmaceutical products as well as biochemical products primarily to hospitals and private retailers located throughout
the PRC. The Company believes Helpson’s business is not subject to any ownership restrictions prescribed under the Catalogue.
Onny acquired 100% of the ownership in Helpson on May 25, 2005 by entering into an Equity Transfer Agreement with Helpson’s
three former shareholders. The transaction was approved by the Commercial Bureau of Hainan Province on June 12, 2005 and Helpson
received the Certificate of Approval for Establishment of Enterprises with Foreign Investment in the PRC on the same day and its
business license evidencing its WFOE (Wholly Foreign Owned Enterprise) status on June 21, 2005.
The Company has acquired and continues
to acquire well-accepted medical formulas to add to its diverse portfolio of Western and Chinese medicines.
Consolidation and Basis of Presentation
–
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America and are expressed in United States dollars. The accompanying consolidated financial statements include the accounts
and operations of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in the consolidation.
Helpson’s functional currency is
the Chinese Renminbi. Helpson’s revenue and expenses are translated into United States dollars at the average exchange rate
for the period. Assets and liabilities are translated at the exchange rate as of the end of the reporting period. Gains or losses
from translating Helpson’s financial statements are included in accumulated other comprehensive income, which is a component
of stockholders’ equity. Gains and losses arising from transactions denominated in a currency other than the functional currency
of the entity that is party to the transaction are included in the results of operations.
Accounting Estimates
-
The
methodology used to prepare for the Company’s financial statements is in conformity with the accounting principles generally
accepted in the United States of America, which requires the management of the Company (“Management”) to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Therefore,
actual results could differ from those estimates.
Cash and Cash Equivalents
–
Cash and cash equivalents include interest bearing and non-interest bearing bank deposits, money market accounts, and short-term
banker’s acceptances notes purchased with maturities of three months or less.
Restricted
Cash
–
Restricted cash includes cash that has been deposited with a bank to satisfy obligations
outstanding under banker’s acceptance notes issued by the Company as discussed in Note 8.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2018
AND 2017 (UNAUDITED)
Trade Accounts Receivable and Allowance
for Doubtful Accounts –
Trade accounts receivables are carried at the original invoiced amounts less an allowance
for doubtful accounts. The allowances for doubtful accounts are calculated based on a detailed review of certain individual customer
accounts and an estimation of the overall economic conditions affecting the Company’s customer base. The Company reviews
a customer’s credit history before extending credit to the customer. If the financial condition of its customers were to
deteriorate, resulting in an impairment of their ability to make payments, additions to the allowance would be required. A provision
is made against accounts receivable to the extent they are considered unlikely to be collected. Charges to bad debt expense totaled
$1,129,105 and $229,566 for the three months ended September 30, 2018 and 2017, respectively and $1,481,786 and $954,518 for the
nine months ended September 30, 2018 and 2017, respectively.
Trade accounts receivable that have been
fully allowed for and determined to be uncollectible are charged against the allowance in the period the determination is made.
The Company charged off uncollectible trade accounts receivable balances in the amount of $0 against the allowance for both the
three and nine months ended September 30, 2018 and 2017, respectively. It is common practice in the PRC for receivables to extend
beyond one year. Customer balances outstanding for more than one year are allowed for at a greater rate when calculating the allowance
for doubtful accounts.
Advances to Suppliers and Advances
from Customers
– Common practice in the PRC is to make advances to suppliers for materials and to receive advances
from customers for finished products. Advances to suppliers are applied to trade accounts payable when the materials are received.
Advances received from customers are applied against trade accounts receivable when finished products are sold. The Company reviews
a supplier’s credit history and background information before advancing a payment. If the financial condition of its suppliers
were to deteriorate, resulting in an impairment of their ability to deliver goods or provide services, the Company would recognize
bad debt expense in the period they are considered unlikely to be collected.
Inventory
– Inventory
consists of raw materials, work in process and finished goods and is stated at the lower of cost or net realizable value. Cost
is determined using a weighted average. For work in process and manufactured inventories, cost consists of raw materials, direct
labor and an allocated portion of the Company’s production overhead. The Company writes down excess and obsolete inventory
to its estimated net realizable value based upon assumptions about future demand and market conditions. For finished goods and
work in process, if the estimated net realizable value for an inventory item, which is the estimated selling price in the ordinary
course of business, less reasonably predicable costs to completion and disposal, is lower than its cost, the specific inventory
item is written down to its estimated net realizable value. Market for raw materials is based on replacement cost. Provisions for
inventory write-downs are included in cost of revenues in the consolidated statements of operations. Inventories are carried at
this lower cost basis until sold or scrapped.
Valuation of Long-Lived Assets
–
The carrying values of long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate
that the carrying values may not be recoverable. When such an event occurs, the Company projects the undiscounted cash flows to
be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections indicate
that the carrying value of an asset will not be recovered, it is reduced by the estimated excess of the carrying value over the
projected discounted cash flows estimated to be generated by the asset. There was no impairment loss recognized for the three and
nine months ended September 30, 2018. For the three and nine months ended September 30, 2017, the Company recognized impairment
losses related to Advances for purchases of intangible assets in the amount of $1,184,103 and $2,162,083 as more fully discussed
in Note 5.
Property and Equipment
–
Property and equipment are stated at cost. Maintenance and repairs are charged to expenses as incurred and major improvements are
capitalized. Gains or losses on sale, trade-in or retirement are included in operations during the period of disposition. Depreciation
relating to office equipment was included in general and administrative expenses, while all other depreciation was included in
cost of revenue.
Revenue Recognition
–
Revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects
the consideration that an entity expects to receive in exchange for those goods or services. In addition, the standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The
amount of revenue that is recorded reflects the consideration that the Company expects to receive in exchange for those goods.
The Company applies the following five-step model in order to determine this amount: (i) identification of the promised goods
in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct
in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration;
(iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company
satisfies each performance obligation.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2018
AND 2017 (UNAUDITED)
The Company only applies the five-step model to contracts
when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers
to the customer. Once a contract is determined to be within the scope of ASC 606 at contract inception, the Company reviews the
contract to determine which performance obligations the Company must deliver and which of these performance obligations are distinct.
The Company recognizes as revenues the amount of the transaction price that is allocated to the respective performance obligation
when the performance obligation is satisfied or as it is satisfied. Generally, the Company’s performance obligations are transferred
to customers at a point in time, typically upon delivery.
For all reporting periods, the Company has not disclosed the
value of unsatisfied performance obligations for all product revenue contracts with an original expected length of one year or
less, which is an optional exemption that is permitted under the adoption rules.
Cost of Revenues
–
Cost of revenues includes wages, materials, depreciation, handling charges, and other expenses associated with the manufacture
and delivery of products.
Research and Development
–
Research and development expenditures are recorded as expenses in the period in which they occur.
Basic and Diluted Loss per Common
Share
-
Basic loss per common share is computed by dividing net loss by the weighted-average number of common
shares outstanding during the period. Diluted loss per share is calculated to give effect to potentially issuable dilutive common
shares.
There were no potentially dilutive common
shares outstanding during the three months and nine ended September 30, 2018 and 2017, respectively.
Credit Risk
–
The carrying amount of accounts receivable included in the balance sheet represents the Company’s exposure to credit risk
in relation to its financial assets. No other financial asset carries a significant exposure to credit risk. The Company performs
ongoing credit evaluations of each customer’s financial condition. The Company maintains allowances for doubtful accounts
and such allowances in the aggregate have not exceeded Management’s estimates.
The Company has its cash in bank deposits
primarily at state owned banks located in the PRC. Historically, deposits in PRC banks have been secured due to the state policy
of protecting depositors’ interests. The PRC promulgated a new Bankruptcy Law in August 2006, effective June 1, 2007,
which contains provisions for the implementation of measures for the bankruptcy of PRC banks. In the event that bankruptcy laws
are enacted for banks in the PRC, the Company’s deposits may be at a higher risk of loss.
Interest Rate Risk
–
The Company is exposed to the risk arising from changing interest rates, which may affect the ability of repayment of existing
debts and viability of securing future debt instruments within the PRC.
Recent Accounting Pronouncements
Recently Issued Pronouncements
In February 2016, the FASB issued ASU No.
2016-02,
Leases
, a new standard on accounting for leases. The ASU introduces a lessee model that brings most leases
on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in the
current accounting guidance as well as the FASB’s new revenue recognition standard. However, the ASU eliminates the use of bright-line
tests in determining lease classification as required in the current guidance. The ASU also requires additional qualitative disclosures
along with specific quantitative disclosures to better enable users of financial statements to assess the amount, timing, and uncertainty
of cash flows arising from leases. The pronouncement is effective for annual reporting periods beginning after December 15, 2018,
including interim periods within that reporting period, using a modified retrospective approach. Early adoption is permitted. The
Company has not completed an evaluation of the impact the pronouncement will have on its consolidated financial statements and
related disclosures.
In June 2016, the FASB issued Accounting
Standards Update 2016-13,
Financial Instruments – Credit Losses (Topic 326)
, which introduces new guidance for
the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses
to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale
(AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since
their origination. The pronouncement will be effective for Public business entities that are SEC filers in fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. Early application of the guidance will be permitted
for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The Company is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements
and related disclosures.
From
time to time, the FASB or other standards setting bodies issue new accounting pronouncements. Updates to the FASB ASCs are communicated
through issuance of ASUs. Unless otherwise discussed, the Company believes that the recently issued guidance, whether adopted or
to be adopted in the future, is not expected to have a material impact on its condensed consolidated financial statements upon
adoption.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2018
AND 2017 (UNAUDITED)
NOTE 2 – INVENTORY
Inventory consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Raw materials
|
|
$
|
4,085,260
|
|
|
$
|
4,733,679
|
|
Work in process
|
|
|
146,708
|
|
|
|
481,863
|
|
Finished goods
|
|
|
1,868,031
|
|
|
|
1,191,613
|
|
Total Inventory
|
|
|
6,099,999
|
|
|
|
6,407,155
|
|
NOTE 3 – PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Permit of land use
|
|
$
|
410,203
|
|
|
$
|
432,910
|
|
Building
|
|
|
9,525,558
|
|
|
|
10,052,840
|
|
Plant, machinery and equipment
|
|
|
26,600,697
|
|
|
|
28,044,515
|
|
Motor vehicle
|
|
|
313,258
|
|
|
|
330,598
|
|
Office equipment
|
|
|
194,898
|
|
|
|
200,974
|
|
Total
|
|
|
37,044,614
|
|
|
|
39,061,837
|
|
Less: accumulated depreciation
|
|
|
(16,987,979
|
)
|
|
|
(15,520,834
|
)
|
Property, plant and equipment, net
|
|
$
|
20,056,635
|
|
|
$
|
23,541,003
|
|
Depreciation is computed on a straight-line basis over the estimated
useful lives of the assets as follows:
Asset
|
|
Life – years
|
Permit of land use
|
|
40 - 70
|
Building
|
|
20 - 49
|
Plant, machinery and equipment
|
|
5 - 10
|
Motor vehicle
|
|
5 - 10
|
Office equipment
|
|
3-5
|
Depreciation relating to office equipment
was included in general and administrative expenses, while all other depreciation was included in cost of revenue. For the three
months ended September 30, 2018 and 2017, depreciation expense was $942,555 and $779,856, respectively. For the nine months ended
September 30, 2018 and 2017 depreciation expense was $2,405,396 and $2,314,928.
NOTE 4 - INTANGIBLE ASSETS
Intangible assets represent the cost of
medical formulas approved for production by the China Food and Drug Administration (“CFDA”). The Company did not obtain
CFDA production approval for any medical formulas during the nine months ended September 30, 2018 and 2017 and no costs were reclassified
from advances to intangible assets during the nine months ended September 30, 2018 and 2017, respectively.
Approved medical formulas are amortized
from the date CFDA approval is obtained over their individually identifiable estimated useful life, which range from ten to thirteen
years. It is at least reasonably possible that a change in the estimated useful lives of the medical formulas could
occur in the near term due to changes in the demand for the drugs and medicines produced from these medical formulas. Amortization
expense relating to intangible assets was $26,861 and $39,630, respectively for the three months ended September 30, 2018 and 2017
and $93,718 and $132,938 for the nine months ended September 30, 2018 and 2017, respectively, and was included in the general and
administrative expenses. Medical formulas typically do not have a residual value at the end of their amortization period. Medical
formulas typically do not have a residual value at the end of their amortization period.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2018
AND 2017 (UNAUDITED)
The Company evaluates each approved medical
formula for impairment at the date of CFDA approval, when indications of impairment are present and also at the date of each financial
statement. The Company’s evaluation is based on an estimated undiscounted net cash flow model, which considers currently
available market data for the related drug and the Company’s estimated market share. If the carrying value of the medical
formula exceeds the estimated future net cash flows, an impairment loss is recognized for the excess of the carrying value over
the fair value of the medical formula, which is determined by the estimated discounted future net cash flows. No impairment loss
was recognized during the three and nine months ended September 30, 2018 and 2017.
Intangible assets consisted solely of CFDA
approved medical formulas as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Gross carrying amount
|
|
$
|
4,916,402
|
|
|
$
|
5,188,547
|
|
Accumulated amortization
|
|
|
(4,627,348
|
)
|
|
|
(4,789,691
|
)
|
Net carrying amount
|
|
$
|
289,054
|
|
|
$
|
398,856
|
|
NOTE 5 – ADVANCES FOR PURCHASES OF INTANGIBLE ASSETS
In order to expand the number of medicines
the Company manufactured and marketed, it entered into contracts with independent laboratories and others for the purchase of medical
formulas. Although CFDA approval had not been obtained for these medical formulas at the dates of the respective contracts, the
objective of the contracts was for the Company to purchase CFDA-approved medical formulas once the CFDA approval process is completed.
The Company received the titles to two patents that relate to medical formulas currently in the CFDA approval process for the year
ended December 31, 2013. These patents are not expired.
Prior to entering into contracts with the
Company, laboratories are typically required to complete all research and development to determine the content of the medical
formula and the method to produce the generic medicine. The application to the CFDA for production approval must be made by the
production facility that will produce the related product. As a result, a contract typically provides that the Company buys the
medical formula from the laboratory and the laboratory is required to assist the Company in applying for and obtaining the production
approval from the CFDA.
A typical CFDA approval process for the
production of a generic medical product involves a number of steps that generally require three to five years to complete. If the
medical formula is purchased at the point when the generic medical product receives the CFDA’s approval for a clinical study,
which is very typical for the Company, the clinical study that follows will usually take from one and a half to three years to
complete. After completing the clinical study, the results are submitted to the CFDA and a production approval application is filed
with the CFDA. In most cases, it will take between eight to eighteen months to prepare and submit the production approval application
and obtain CFDA approval. Upon approving the generic medical product, the CFDA issues a production certificate and the Company
can commence the production and sales of the generic medical product. As a result of this process, CFDA approval is expected to
be received in approximately two to five years from the date the Company signs the medical formula contracts.
Under the terms of the contracts, the laboratories
are required to assist the Company in obtaining production approval for the medical formulas from the CFDA. Management monitors
the status of each medical formula on a regular basis in order to assess whether the laboratories are performing adequately under
the contracts. If a medical product is not approved by the CFDA, as evidenced by their issuance of a denial letter, or if the laboratory
breaches the contract, the laboratory is required under the contract to provide a refund to the Company of the full amount of the
payments made to the laboratory for that formula, or the Company can require the application of those payments to another medical
formula with the same laboratory. As a result of the refund right, the Company is ultimately purchasing an approved medical product.
Accordingly, payments made prior to the issuance of production approval by the CFDA are recorded as advances for purchases of intangible
assets.
During 2017, based on the Company’s monitoring
and assessment process, the Company determined that advance payments made to independent laboratories were impaired. As a
result, the Company recognized an impairment loss in the amount of $1,184,103 and $2,162,083 for the three and nine months ended
September 30, 2017. There was no impairment loss recognized for the three and nine months ended September 30, 2018.
To date, no formula has failed to receive
CFDA production approval nor has the Company been informed or been made aware of any formula that may fail to receive such approval.
However, there is no assurance that the medical products will receive production approval and if the Company does not receive such
approval, it will enforce its contractual rights to receive a refund from the laboratory or have the payments applied to another
medical formula with the same laboratory.
As of September 30, 2018, the Company was
obligated to pay laboratories and others approximately $1.1 million upon the completion of various phases of contracts to obtain
CFDA production approval of medical formulas.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2018
AND 2017 (UNAUDITED)
NOTE 6 – RELATED PARTY TRANSACTIONS
A member of the Company’s board of
directors (“Board”) had previously advanced the Company an aggregate amount of $1,354,567 as of September 30, 2018
and December 31, 2017 which are recorded as Other payables – related parties on the accompanying consolidated balance sheets.
The advances bear interest at a rate of 1.0% per year. Total interest expense for the three months ended September 30,
2018 and 2017 was $3,386 and $3,386. Total interest expense for the nine months ended September 30, 2018 and 2017 was $10,159 and
$10,159, respectively.
NOTE 7 – BANKER’S ACCEPTANCE NOTES
PAYABLE
In April 2016, the Company entered into
a Banker’s Acceptance Note Agreement with a bank. Pursuant to the terms of the agreement, the Company can issue banker’s acceptance
notes to any third party as payment of amounts owing to that third party. The Company is required to deposit with the bank an amount
equal to the amounts represented by the banker’s acceptance notes issued to the third parties. The amount of these deposited balances
is shown as “Restricted cash” on the accompanying balance sheets as of September 30, 2018 and December 31, 2017. The
maximum amount that the Company can issue under this agreement is limited to the lesser of RMB30,000,000 (approximately $4.5 million)
or the amount of cash available to deposit against the banker’s acceptance notes. In addition, the agreement calls for the payment
of fees equal to 0.05% of the note amount to the bank. At September 30, 2018 and December 31, 2017, the Company had outstanding
banker’s acceptance notes in the amount of $1,476,344 and $709,796, respectively.
NOTE 8 – CONSTRUCTION LOAN FACILITY
The Company obtained a construction loan facility, dated June
21, 2013, in the aggregate amount of RMB 80,000,000 (approximately $13 million). The loan facility is for an eight-year term, which
commenced on July 11, 2013, the initial draw-down date. The proceeds of the loan were used for and are collateralized by the
construction of the Company’s new production facility and the included production line equipment and machinery. The loan
bears interest based upon 110% of the PRC government’s eight-year term rate effective on the actual draw-down date, subject
to annual adjustments based on 110% of the floating rate for the same type of loan on the anniversary from the draw-down date and
its subsequent anniversary dates. On July 10, 2016, 2017 and 2018 the interest rate was adjusted to 5.39%, 5.73% and
5.73%, respectively. The loan required interest only payments for the first two years. Beginning July 11, 2015, the balance
of the principal was due in at least two (2) annual installments with the first annual payment being due within six month period
after July 10, 2015 and the second annual payment being due July 10, 2016 and each following year over the next five years through
July 11, 2022 on the identical terms as described above for 2015. The Company has made all required payments due under the loan.
As of September 30, 2018, the Company had no additional amounts available to it under this facility. During the nine months ended
September 30, 2018, the Company made principal payments in the amount of $2,303,410 (RMB 15,000,000).
Principal payments required for the
remaining term of the loan facility as of September 30, 2018 are as follows:
Year
|
|
Amount
|
|
2018
|
|
|
-
|
|
2019
|
|
|
2,184,508
|
|
2020
|
|
|
2,184,508
|
|
2021
|
|
|
2,184,508
|
|
|
|
$
|
6,553,524
|
|
Fair Value of Construction Loan Facility
– Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities, the carrying
amounts of the construction loan facility outstanding as of September 30, 2018 and December 31, 2017 approximated its fair value
because the underlying instrument bears an interest rate that approximated current market rates.
NOTE 9 - INCOME TAXES
Deferred income tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered
or settled. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period
that includes the enactment date.
Liabilities are established for uncertain tax positions expected
to be taken in income tax returns when such positions are judged to meet the “more-likely-than-not” threshold based
on the technical merits of the positions. Estimated interest and penalties related to uncertain tax positions are included as a
component of other expenses. Through December 31, 2017, the Company has not identified any uncertain tax positions that it has
taken. U.S. income tax returns for the years ended December 31, 2014 through December 31, 2017 and the Chinese income tax return
for the year ended December 31, 2017 are open for possible examination.
On March 16, 2007, the National People’s
Congress of China passed the Enterprise Income Tax Law (EIT Law) and on December 6, 2007, the State Council of China issued the
Implementation Regulations for the EIT Law which took effect on January 1, 2008. The EIT Law and Implementation Regulations
Rules impose a unified EIT of 25% on all domestic-invested enterprises and Foreign Invested Entities, or FIEs, unless they qualify
under certain limited exceptions.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2018
AND 2017 (UNAUDITED)
The Company is located in a special region,
which had a 15% corporate income tax rate before the new EIT Law. The new EIT Law abolished the preferential corporate income tax
rate in the special region. The Company transitioned to the new 25% tax rate over a five year period which began on January 1,
2008. During 2010, the Company applied for and received a favorable tax rate of 15% for fiscal 2011 through 2013 due to its status
in the PRC as a high technology enterprise. In 2013, the Company again applied for and received the same favorable tax rate for
2014 to 2016. The recent net losses have put the Company in an unfavorable position for the potential renewal of “National
High-Tech Enterprise” status in 2017. After evaluating the feasibility of the renewal, the Company has decided not to renew
this status. Under the current tax law in the PRC, the Company is and will be subject to the enterprise income tax rate of
25%.
The provision for income taxes consisted
of the following:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Current
|
|
$
|
(181,524
|
)
|
|
$
|
-
|
|
|
$
|
(181,524
|
)
|
|
$
|
-
|
|
Deferred
|
|
|
21,039
|
|
|
|
31,198
|
|
|
|
69,614
|
|
|
|
92,106
|
|
Total income tax expense
|
|
$
|
(160,485
|
)
|
|
$
|
31,198
|
|
|
$
|
(111,910
|
)
|
|
$
|
92,106
|
|
As of September 30, 2018, the Company had
net operating loss carryforwards for PRC tax purposes of approximately $57.8 million which are available to offset any future taxable
income through 2022. Approximately $6.1 million of these carryforwards will expire in 2018. The Company also has net operating
losses for United States federal income tax purposes of approximately $5.3 million which are available to offset future taxable
income, if any, through 2038. During quarter ending September 30, 2018, the Company received a refund related to its 2013 PRC tax
return in the amount of $181,524.
Recent U.S. federal tax legislation, commonly
referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The
U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal
corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating
many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory
deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally
eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings.
In assessing the realizability of deferred
tax assets, Management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those differences become deductible or tax loss carry forwards are utilized. Management
considers projected future taxable income and tax planning strategies in making this assessment. Based upon an assessment
of the level of historical taxable income and projections for future taxable income over the periods on which the deferred tax
assets are deductible or can be utilized, Management believes it is not likely for the Company to realize all benefits of the deferred
tax assets as of September 30, 2018 and December 31, 2017. Therefore, the Company provided for a valuation allowance
against its deferred tax assets of $26,726,483 and $27,270,737 as of September 30, 2018 and December 31, 2017, respectively.
The Company also incurred various other
taxes, comprised primarily of business taxes, value-added taxes, urban construction taxes, education surcharges and others. Any
unpaid amounts are reflected on the balance sheets as accrued taxes payable.
NOTE 10 – FAIR VALUE MEASUREMENTS
Fair value is
defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. To measure fair value, a hierarchy has been established which requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and
liabilities as follows: Level 1 – Quoted prices in active markets for identical assets or liabilities. Level 2 – Observable
inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other
observable inputs that can be corroborated by observable market data. Level 3 – Unobservable inputs supported by little or
no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies,
or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment
or estimation.
CHINA PHARMA HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2018
AND 2017 (UNAUDITED)
The Company uses
fair value to measure the value of the banker’s acceptance notes it holds. The banker’s acceptance notes are recorded at cost
which approximates fair value. The Company held the following assets and liabilities recorded at fair value:
|
|
December 31,
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
Description
|
|
2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Banker’s acceptance notes
|
|
$
|
39,867
|
|
|
$
|
-
|
|
|
$
|
39,867
|
|
|
$
|
-
|
|
Total
|
|
$
|
39,867
|
|
|
$
|
-
|
|
|
$
|
39,867
|
|
|
$
|
-
|
|
NOTE 11 - STOCKHOLDERS’ EQUITY
The Company is authorized to issue 95,000,000
shares of common stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par value. The preferred stock may be
issued in series with such designations, preferences, stated values, rights, qualifications or limitations as determined solely
by the Company’s Board.
Employee Stock Options
2010 Incentive Plan
On November 12, 2010, the Company’s
Board of Directors adopted the Company’s 2010 Incentive Plan (the “Plan”), which was then approved by stockholders
on December 22, 2010. The Plan gave the Company the ability to grant stock options, restricted stock, stock appreciation rights
and performance units to its employees, directors and consultants, or those who will become employees, directors and consultants
of the Company and/or its subsidiaries. The Plan currently allows for equity awards of up to 4,000,000 shares of common stock.
Through September 30, 2018, there were 175,000 shares of restricted stock granted and outstanding under the Plan. No options
were outstanding as of September 30, 2018 under the Plan.
There were no securities issued from the Plan during each of
the nine months ended September 30, 2018 and 2017.
The Company recognized no compensation
expense related to the awards of common shares and the grants and modifications of stock options during each of the three and nine
months ended September 30, 2018 and 2017.
The fair value of each option award is
estimated on the date of grant using the Black-Scholes Option Pricing Model. Expected volatility is based on the historical volatility
of the Company’s common stock prices. The Company uses historical data to estimate employee termination rates. The expected
term of options granted is determined by the simplified method, which is one-half of the original contractual term. The simplified
method is used due to the lack of historical share option exercise data to provide a reasonable basis upon which to estimate expected
term. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect
at the time of grant.
As of September 30, 2018, there was no
remaining unrecognized compensation expense related to stock options or restricted stock grants.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Economic environment
-
Substantially
all of the Company’s operations are conducted in the PRC, and therefore the Company is subject to special considerations and significant
risks not typically associated with companies operating in the United States of America. These risks include, among others, the
political, economic and legal environments and fluctuations in the foreign currency exchange rate. The Company’s results from operations
may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods
of taxation, among other things. The unfavorable changes in global macroeconomic factors may also adversely affect the Company’s
operations.
In addition, all of the Company’s revenue
is denominated in the PRC’s currency of Renminbi (RMB), which must be converted into other currencies before remittance out of
the PRC. Both the conversion of RMB into foreign currencies and the remittance of foreign currencies abroad require approval of
the PRC government.
NOTE 13 – CONCENTRATIONS
For the nine months ended September 30,
2018, no customer accounted for more than 10% of sales and two customers accounted for 47.3% and 14.0% of accounts receivable. Three
suppliers accounted for 23.6%, 20.5% and 13.5% of raw material purchases.
For the nine months ended September 30,
2017, no customer accounted for more than 10% of sales and two customers accounted for 47% and 14% of accounts receivable, respectively. Four
suppliers accounted for 21.1%, 17.4%, 15.3% and 14.7% of raw material purchases.
NOTE 14 – SUBSEQUENT EVENTS
In accordance with ASC 855-10 the Company’s operations
were reviewed by Management subsequent to September 30, 2018 to the date these consolidated financial statements were issued,
and have determined we do not have any material subsequent events to disclose in these consolidated financial statements.